Tuesday, October 28, 2008, 4:07 PM

Political GPS: With only 7 days and counting as we post this entry, here are this week’s thoughts on political law developments.

FEC DEADLOCKS OVER PROPOSED ISSUE ADS: DOES THIS SIGNAL A SHIFT TO MORE PARTISANSHIP ON THE COMMISSION?

The Federal Election Commission deadlocked last Thursday over whether a non-profit group’s proposed radio ads can only be read as urging the defeat of Senator Barack Obama. The split on the six-member Commission, along party lines, was the first test of new FEC rules that the agency claimed in December 2007 would “provide guidance to organizations as to the permissible funding... required for communications broadcast within the EC periods” – shorthand for the 30 days before a primary and 60 days before a general election.

The FEC is grappling with this issue because of a Supreme Court ruling last year, holding that corporations (including non-profits) and unions may air ads during the EC periods so long as they do not expressly advocate the election or defeat of a candidate. The Court’s ruling was a blow to the McCain-Feingold law (and many state law imitators) that banned corporations from financing such ads merely for referring to a federal candidate. The Court did, however, leave in place the blackout for corporate-funded ads which are the equivalent of express advocacy – that is, ads that can be viewed only as calling for the election or defeat of a candidate. This is the Constitutional test that the FEC rules were intended to flesh out.

Does this deadlock portend “a new era of partisanship on the Commission,” as suggested by FEC-watcher, Professor Richard Hasen? We think not. First of all, deadlocks over the “express advocacy” test have been common for years, though frequently hidden from view because enforcement matters are discussed by the FEC in private sessions. When such matters become public, there is often no record of the ads that Commissioners disagreed about; there is simply a record as to those where four or more could agree.

Second, the split vote in this case is about a core concept of election law: government regulation of ads that are at least arguably issue-based. Historically, the Democratic Commissioners have supported a broader reading of the express advocacy test than have the Republicans. While there is certainly a history of partisanship at the FEC, the dispute in this case strikes us more as a matter of ideology, rather than sympathy for the group asking for a legal opinion.

Third, there has been a lot of recent turnover on the Commission. Commissioners are still taking the measure of their colleagues and staking out positions on key issues. Unfortunately, neither of the alternative drafts that the Commission considered last week offered a promising path to resolution. The draft from the Office of General Counsel cited the “tone” of one ad as evidence of express advocacy – a test found nowhere in recent analyses of express advocacy by the courts or the FEC’s new regulation, and that advertisers would find virtually impossible to apply. Similarly, but reaching the opposite result, the draft presented by the FEC Chairman argued that the “central focus” of the proposed ads is not electoral, going to some lengths to find five different ways these brief radio ads might be interpreted.

A resolution might be aided by consideration of the Commission’s findings of law in recent enforcement matters, most notably the settlements with some of the 527 groups from the 2004 elections. But neither of last week’s drafts mentions the FEC’s enforcement experience with the concept of express advocacy. Indeed, perusing the drafts gives the impression that this is the FEC’s first application of the express advocacy test since FEC v. Furgatch, a case decided by the Ninth Circuit in 1987.

Fourth, it must be said that the test fashioned by Chief Justice Roberts made such disagreements inevitable. Three Justices who concurred in the outcome but would have preferred to ditch the ad blackout entirely, wrote that the Court test left “ample room for debate and uncertainty.” Even Justice Alito, the lone Justice to join the Roberts opinion, fretted that the Court’s new test might fail the test of time.

Finally, while Chief Justice Roberts wrote that in close calls “the tie goes to the speaker,” the FEC’s rules implementing the Court’s decision create a “safe harbor” only for ads that are indisputably about issues. As to everything else, there are no clear markers.

So the stage was set for gridlock: a loosely-worded Supreme Court test, FEC rules that failed to set down clear guidelines, new Commissioners on the scene, and draft rulings that may have made it difficult to reach agreement.

We hope that Commissioners will return to last week’s request and resolve how to apply the FEC rules for distinguishing issue ads from campaign ads. Political advertisers are entitled to know when ads can be funded by corporate or labor sources, and when such funding exposes them to investigations, fines, and other sanctions.

BRAVE NEW WORLD – FINANCIAL SERVICES IN THE CROSSHAIRS

In the October 1 Political GPS we discussed the brave new world of regulation that has been ushered in by the current economic crisis. And from what we can see, “Joe the Hedge Fund Manager” should have as many concerns as “Joe the Plumber.” In short, the financial services industry will need to shift its government relations and PAC efforts into overdrive in order to outrun the regulatory tsunami headed its way.

As we have mentioned before, in attempting to put out some of these legislatives fires, new players in the halls of Congress should be careful not to start another one. The regulation of federal lobbying itself has undergone vast changes in the past year, with stepped-up reporting, random audits, and potential for criminal investigations and prosecution. More than ever, an effective lobbying program should include systems for effective lobbying compliance. And political fundraising -- through a PAC or by company executives -- requires careful attention to complicated federal regulations.

So what’s on the horizon? Rep. Henry Waxman, Chairman of the House Committee on Oversight and Government Reform, has scheduled five hearings in October on different aspects of the financial crisis, including a panel last week targeting hedge funds. It’s no secret that hedge funds are among Chairman Waxman’s targets for new regulation. Similarly, Rep. Barney Frank, Chairman of the Financial Services Committee, says he’s outraged with hedge funds that oppose the renegotiation of mortgages in order to protect the value of the funds’ investments. He has scheduled a hearing on November 12, and has indicated that a refusal to demonstrate cooperation may lead to “tougher legislation” governing the industry.

Meanwhile on the Senate side, Sen. Dianne Feinstein has signaled that a firm’s participation in the government rescue plan may come at the expense of its First Amendment right to petition the government. The Senator, who chairs the committee responsible for ethics and campaign finance issues, promises to introduce legislation to ensure that companies receiving government loans and grants through the rescue plan may not use taxpayer funds for lobbying efforts.

These stirrings in Congress should also be viewed in the context of other possible ethics reforms in a probable Obama administration. For the financial services industry - and others ramping up their political operations - it’s important that lobbying expenses are monitored, publicly-filed reports are complete and can withstand a federal audit, lobbyists and senior executives are familiar with Congressional gift rules, and that all fundraising efforts comply with federal guidelines.

If you have any questions or would like more information, please feel free to contact Larry (LNorton@wcsr.com, (202) 857-4429) or Jim (JKahl@wcsr.com, (202) 857-4417).
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